China No Help In Recession

China announced last Friday that its economy grew 8.7% last year. Among other things, this will prompt a chorus of claims that China is leading the world out of recession.

Wrong.

The typical way of thinking about this is to take China’s and every other country’s GDP growth, add it all up, and see which economy contributed most to the world’s pile. But that is not the way GDP works.

Consider the case of a country that successfully dictates trade terms such that it extracts a great deal of wealth from its partners. Its GDP would grow very quickly while that of its partners would shrink or grow much more slowly. It would then seem that the predator is leading global growth higher, when it is enriching itself at the rest of the world’s expense.

Behind this possibility is that GDP includes trade. A trade surplus adds to GDP and a trade deficit takes away. China runs the largest trade surplus, which means the rest of the world runs a large trade deficit with the PRC.

Seen that way, China is not adding anything to global growth. Using trade, it is adding the most to its own GDP and taking away the most from the rest of the globe’s.

It need not be so. China could encourage the development of its domestic economy, as it has long been urged to do for its own sake and that of its own people. This would increase demand for goods produced in the rest of the world. Then, and only then, China might actually be an engine for the world economy.

The distinction is between performance and welfare. China is outperforming the world but it is not contributing to global GDP, just the opposite. Some of its gains are intrinsic to offsetting GDP losses for the rest of the world.

Beyond GDP, the PRC has contributed a great deal to the world economy, especially earlier in the decade. Competition is the life-blood of long-term growth, however it is measured, and competition from Chinese goods is arguably the biggest contributor over the past decade to competition in the global economy. In terms of policy, Chinese production kept consumer prices down worldwide, helping to keep inflation low despite high levels of government stimulus around the world.

The financial crisis has changed this, unfortunately. Previously, Chinese supply was helping meeting strong global demand. Now, Chinese supply is threatening to overwhelm weak global demand. Rather than leading, China is using the world to boost itself higher.